Carbon bill spurs clean energy stocks

Senate approval of the government’s carbon pricing scheme has removed some of the legislative uncertainty surrounding Australia’s move to a low-carbon economy and sparked renewed interest in companies leveraged to clean energy and carbon offset schemes.

But the capital required to fund research and development and pilot plants as well as to commercialise the technology means companies in the fledgling renewable energy industry face considerable hurdles at a time when global growth concerns and market volatility weigh on funding sources.

Investors should be wary of companies that float at the point of completing R&D programs, when the technology potential looks particularly attractive, only to end up stuck in the commercialisation phase and risk having to return to the market for additional capital.

For
Carbon Conscious
, however, yesterday’s 36 to 32 Senate vote signals the prospect of increased transactions in carbon bio-sequestration projects in Australia.

The company creates what it calls “carbon estates", essentially tracts of land for forestation, in order to produce carbon offset credits valid under the government’s carbon farming initiative legislation, passed in September.

Listed in March 2008, the company has more than 8000 hectares of Mallee eucalypts under management in Western Australia and New Zealand.

Arkx Investment Management managing director Tim Buckley said Carbon Conscious had been successful in building a business model with big company endorsements via contract support from the likes of Origin Energy and BP. “Renewable energy is a huge area of growth but it has been profitless prosperity for almost everyone," he said.

When so many Australian companies linked to a low-carbon economy have such low market capitalisations, the risk for investors is that companies might not be able to get the funding needed for capital expenditure to accelerate growth.

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“You’re definitely in a danger zone because of the emerging nature of the companies and the technologies involved. So one of the critical features we look at is whether the companies have real revenues," Mr Buckley said.

Carbon Conscious posted an improved net profit for the 2010 financial year of $900,000, up from $300,000 on the previous corresponding period.

But rather than pushing an international expansion, the company’s strategy is now to focus on the Australasian market, stick with profitable growth via sensibly structured milestones and secure large-company endorsements.

“Company endorsement is critical because there are plenty of companies which have blown up while waiting for the legislative clarity we are starting to see," Mr Buckley said.

Carbon Conscious chief executive
Peter Balsarini
said with carbon’s starting price of $23 a tonne, as mandated by legislation, the total value of Carbon Conscious’s commercial forestry contracts is $45 million, with a further $190 million under option. “And there is potential for movement in at least some of those options in the short term, particularly given [yesterday’s] decision," he said.

“We are different and deal primarily with the big end of town. Where the MIS is front-end funded in year one, our model is for half to be paid upfront and half received in ongoing management fees, which means we have enduring revenue to look after trees."

Shares in the $25 million company have risen 226 per cent this year, and are trading at close to a 23-month high.

Melbourne-based brokerage Investorfirst Securities has a “speculative buy" rating on the slightly larger peer company
C02 Group
, which provides carbon offset credits to clients such as Woodside Petroleum and Qantas.

C02 Group is also trading on a high earnings multiple of 40 times.

In March, the company launched an “environmental trading division", Carbon Banc, which provides a platform for clients to identify and obtain environmental units that can be used to meet obligations imposed under various state and federal carbon initiatives.

During this year the stock has slipped about 11 per cent, but is trading flat over a 12-month period.

Solar and wind energy producer
CBD Energy
has managed to secure significant international investment, allowing it access to capital and scale to underpin growth.

The company, with a market capitalisation of about $45 million, posted revenue for the 2011 financial year of $165 million, although the share price has slipped about 15 per cent over the course of the year, off a 12-month peak of 18¢.

In October, the company confirmed it would branch into retail electricity supply, acquiring Neighbourhood Energy from Alinta Energy for $24.9 million.

The company expects the purchase will add about $7.5 million profit for the financial year to June 2012.